All United States (“U.S.”) persons are taxable on their worldwide income. The U.S. uses the U.S. dollar as the reportable functional currency to report income taxes and the calendar year as the functional time period to report all income and expenses, on a cash or paid basis. This is regardless of the host countries functional currency, tax year end or reporting method- cash or accrual, that the U.S. expat finds themselves living and working in.

Whether it is: 1) U.S. income tax minimization, or as equally if not more important 2) U.S. tax compliance- complying with USC (United States Code) title 26 or 31 dealing with the Internal Revenue Code or the provisions for dealing with Money and Finance for FBAR- Form 114- Report of Foreign Bank and Financial Accounts or FATCA’s (Foreign Account Tax Compliance Acts) Form 8938- Statement of Specified Foreign Financial Assets, or the acquisition of good, sound and proper tax advice—- Protax is perfectly positioned within its niche core practice to provide and deliver perfectly, timely and properly on these much important goals and objectives!

Plan ahead of time

It is important to get your financial affairs and tax advice in order for both the home country in which you are leaving and the host country you plan on working and living in. While there is plenty of advice from both a home and host country perspective, most of the advice is not accurate and most often leads to confusion and poor U.S. income tax filings and planning, there are some general rules of thumb that every expatriate should keep in mind.

Doing some cursory research into U.S. expatriate income tax laws and regulations can save you from a lot of stress come tax season. This will also help you decide on a competent and thorough U.S. tax Certified Public Accountant (C.P.A .) that specializes in this niche tax area. Both the U.S. expatriate and host country income taxes and their respective income tax systems are not your only consideration, if you are married with children you will need to investigate the schooling system in the host country of assignment. In many cases those host assignment countries have English private expatriate schools/ systems, even in none English speaking countries that cater to the children of foreign assignees and diplomates.

Hiring the right professional movers, finding a good area to live where there are other U.S. expatriates, that is safe and finding affordable housing are all critical considerations. Understanding such things as the host country public transportation systems, currency and even voltage and electrical adapter requirements can all play a critical role making your assignment successful and stress free.

Find a professional expatriate tax expert

Consulting with an ethical and knowledgeable C.P.A. tax expert will not only help you with your finances and tax laws, they will inform and guide you through the entire process of expatriate tax laws for both the home and host countries in question. Income tax laws for U.S. expatriates can be a minefield of rules and regulations. Having a C.P.A. professional on your side can save you a lot of trouble when it comes to minimizing and filing your income taxes when working as a U.S. expatriate.

More importantly since those laws and regulations are so complex, hiring the right U.S. individual income tax C.P.A. can save you lots of time, energy and frustration and in addition to explaining you the respective tax law they can actually do the work freeing you from the anxiety and an improper U.S. income tax filing. Filing income taxes as a U.S. expatriate can be quite different from what you are used to as compared to simply living and working in the U.S., depending on the host country you plan on residing in, having knowledge on your side can save you from additional stress when it is time to start filing your U.S. income taxes. This is most true since, most foreign countries have an income tax of their own, which can be as high or higher than U.S. income tax rate system, some countries have much lower rates and other countries have no income tax at all.

Report all applicable income

Every U.S. person- U.S. citizens, U.S. green card holders and those individuals meeting the Substantial Presence Test have a legal requirement to pay U.S. taxation on their worldwide income- wages, interest, dividends, rental income, royalties, capital gains, etc… no matter where it is sourced to or from, where the money or property is located or the currency that the investments are held in for individuals living and earning money in any country worldwide. For U.S. expats living abroad, however, the mechanisms behind these U.S. income tax filings can be quite difficult to understand. One of our fortes at Protax is knowing the ins and outs behind U.S. expatriate taxes for U.S. persons living and working in countries worldwide.

Know when exclusions and deductions apply

The U.S. filing obligation on worldwide income is for life if your income exceeds the annualized threshold amount- the combination of your exemption and standard deduction. However as of January 1, 2018 under the TCJA of 2017 the exemption goes away.

Avoid paying extra income taxes by taking advantage of exclusions and deductions and foreign tax credits when it’s time to file your taxes. There are many opportunities to use special exclusions and credits while abroad, but to use them you must first qualify and file a U.S. tax return.

The foreign earned income exclusion (FEIE) amount is $103,900 for 2018 ($102,100 for 2017, $101,300 for 2016, $100,800 for 2015, $99,200 for 2014, $97,600 for 2013, $95,100 for 2012 and $92,900 for 2011) – and this is per spouse. The exclusions are not available on government wages earned abroad. Effective January 1, 2006 as amended by IRC Sec. 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) is “Stacking”. “Stacking” results in the next dollar of income taxed at a much higher marginal rate of tax, as though it were the $103,901st dollar of income earned.

There is also the foreign housing exclusion (HE) (or deduction (HD) in the case of a self-employed person), which can greatly augment the 2018 FEIE of $103,900. However there is: 1) A base (deductible) amount that is 16% of the FEIE of $103,900 for 2018 or $16,624 per annum or $45.54 per day and 2) An overall effective cap on the total qualified housing costs eligible for consideration for either the HE or HD, at 30% of the FEIE of $103,900 which for 2018 is $31,170. However the IRS issued IRS Notice 2017-21 (and continues to issue similar Notices annually) which allows for this cap to be overridden and augmented in certain circumstances.

After the two above exclusions are considered should foreign earned or unearned income still exist, a U.S. Foreign Tax Credit (FTC) (i.e.- foreign taxes paid on foreign income, if any), in combination should wipe out any U.S. income tax. But not to the extent of U.S. income, on which no foreign tax credit nor exclusion is allowed. Additionally effective January 1, 2005 there is no longer a 90% limitation on the Alternative Minimum Tax (AMT) FTC. Therefore when in AMT it is now possible to achieve a full U.S. FTC against U.S. income tax and reduce the U.S. tax to NIL.

To qualify for the FEIE you must: 1) have a tax home outside the US for at least 12 full months (any 12), and 2) meet either the i) Bonfide Residence Test (BFR) or ii) Physical Presence Test (PPT). As long as you do not work directly for the U.S. military, then to qualify for the BFR test you must be outside the U.S. for a full calendar year, while for the PPT test you must have at least the 330 full days in a foreign country in any 365 (366 leap year) day period. The BFR is a qualitative test, the PPT a quantitative test.

Short-term assignments (1 year of less) will NOT qualify for the exclusions but will qualify for the foreign tax credit. Additionally, in the case of short-term assignments there exists standard non-taxable daily per diems for lodging, meals and incidentals that can offset large portions of foreign earned income.

A C.P.A. that specializes in U.S. individual international taxation can steer you in the right direction when it comes time to filing U.S. expatriate income taxes.

Filing taxes as a new US expatriate can be an intimidating process, but these tips should guide you in the right direction in your new journey. For more comprehensive knowledge regarding US expatriate tax law, please visit us at Protax Consulting Services, Inc.

Marc J Strohl, CPA of Protax Consulting Services has written articles published by Thomson Reuters in their Practical International Tax Strategies, Journal of International Taxation and Practical Tax Strategies publications and that are referenced and used by other U.S. tax C.P.A. and Attorney consultancy firms both in and outside the U.S. – such as the Big Four – to educate their clients and other tax experts in terms of international tax situations.

In addition Strohl conducts webinars and live presentations for CCH Wolters Kluwer, Strafford Publications, the Clear Law Institute and the New York State Society of Certified Public Accountants (NYSSCPA), Furthered Education and Lawline. He has been quoted in the NYSSCPA’s Trusted Professional, New York Post, and The Wall Street Journal.